High court: Taxpayers need not exhaust municipal remedies to challenge a town’s power to tax
By THE STAR STAFF
The Puerto Rico Supreme Court has ruled that taxpayers are not required to exhaust municipal administrative remedies before going to court when what they are contesting is a municipality’s authority to impose a tax, rather than the amount owed.
The unanimous opinion, authored by Associate Justice Erick V. Kolthoff Caraballo, arose from Continental Lord Inc. v. Municipio Autónomo de Morovis. The case clarifies the distinction between challenging the quantum of a municipal tax, where administrative remedies must be exhausted, and challenging the legal authority of a municipality to levy that tax, where exhaustion is not required.
The Puerto Rico Electric Power Authority had hired Continental Lord Inc. for a $2.78 million project to replace utility poles in Morovis. In January 2025, the municipality notified the company that it owed $139,378.73 in construction taxes. The company objected, citing an exemption under Law 83 of 1941, but paid the amount under protest to avoid delaying the project.
Under the Municipal Code, a taxpayer may submit a “payment under protest” accompanied by a request for reconsideration. The municipality then has 10 days to respond. Morovis did not answer within the statutory period, which the Supreme Court held must be treated as a tacit denial.
Continental Lord filed suit in the Court of First Instance. Morovis failed to answer the complaint, was declared in default, and judgment was entered against it. On appeal, however, the Puerto Rico Court of Appeals reversed, holding that the lower court lacked jurisdiction because the company had not exhausted administrative remedies.
The Supreme Court disagreed.
The opinion explains that judicial review of administrative decisions generally requires a final agency determination and exhaustion of available administrative remedies. But the court emphasized a long‑standing exception: when a taxpayer challenges the municipality’s legal authority to impose a tax, exhaustion is not required.
Requiring taxpayers to seek administrative review in such cases “would be impractical,” the court wrote, because municipalities have already taken a definitive position by enacting the tax ordinance itself.
The high court also reaffirmed that tax exemptions must be interpreted restrictively, and any ambiguity must be resolved against the existence of an exemption.
The court held that Morovis’ failure to respond within 10 days to the payment‑under‑protest filing constituted a final determination, opening the door to judicial review. Allowing municipalities to ignore reconsideration requests indefinitely would contradict basic principles of fairness, the court said.
Because Continental Lord followed the correct procedure, the court reinstated the judgment of the Court of First Instance and reversed the Court of Appeals ruling.
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